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Bond valuation

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Assume your instructor has two bonds in his portfolio. Both have face values of $1,000 and pay a 10% annual coupon rate.

Bond L (longer maturity) matures in 15 years and Bond S (shorter maturity) matures in 1 year

What will the value of each bond be if the market interest rate for similar rated and maturing bonds is 5%, 8%, and 12%?

Why does the longer-term bondâ??s price (Bond L) vary more than the price of the shorter-term bond (Bond S) when market interest rates change?

Regarding the yield curve - DO NOT include in discussion submitted.

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Solution Preview

The value of the bond is the present value of interest and principal. For Bond L, the interest amount is $100, principal amount is $1,000 and the maturity is 15 years. Since interest is an annuity we use the PVIFA table to get the PV factor. For principal we use the PVIF table. For Bond S, interest amount is $100, ...

Solution Summary

The solution explains the differences in bond prices of a short maturity and long maturity bonds